Military Update
Case challenges scope of loan relief for reservists
Military Update focuses on issues affecting pay, benefits and lifestyle of active and retired servicepeople. Its author, Tom Philpott, is a Virginia-based syndicated columnist and freelance writer. He has covered military issues for almost 25 years, including six years as editor of Navy Times. For 17 years he worked as a writer and senior editor for Army Times Publishing Co. Philpott, 49, enlisted in the U.S. Coast Guard in 1973 and served as an information officer from 1974-77.
By Tom Philpott
Reservists called to active duty have a right under the Soldiers' and Sailors' Civil Relief Act to request that banks and other lenders reduce interest rates on outstanding loans to no more than 6 percent during their period of mobilization.
With 40,000 reservists already recalled for the war on terrorism, a court case involving a reservist with business loans promises to clarify the scope of the SSCRA's loan relief provision. Does it apply, for example, to hefty loans that a reservist arranges for an incorporated business?
Yes, said federal District Court Judge Robert G. James of Monroe, La. In a preliminary ruling last August, James has cleared the way for an unprecedented court showdown next year between a multi-billion dollar bank and a reserve Army officer who saw his business fail after a nine-month deployment to Bosnia in 1996.
Lt. Col. Stewart A. Cathey said BancorpSouth Bank, formerly First Republic Bank, refused his request to lower the interest rate on business loans totaling $850,000 from 11.5 percent to the SSCRA's ceiling of 6 percent. By refusing his request, Cathey contends, the bank illegally deprived his business — two gas stations with convenience stores — of $50,000 in loan relief, money he could have used to restock and revive his store operations after returning from Bosnia.
When Cathey couldn't pay his loans, BancorpSouth foreclosed on the properties and bought them back at sheriff's sale. It resold one of the properties.
"This is, by all measures, the most egregious violation of a soldier's rights in the history of this Act," said Cathey, 48, a communications specialist who first entered the Army in 1972.
"Somebody needs to pop these guys right between the eyes so they get the message," said his lawyer, John S. Odom Jr., of Shreveport, La. "If we can pop BancorpSouth for a couple of million, before a jury, it will get the banking community's complete and undivided attention."
Cathey seeks $4.6 million, mostly for lost future business income. His case got a boost in August when Judge James denied the bank's motion to dismiss and accepted a judge magistrate's finding that BancorpSouth had violated the SSCRA. James said entitlement to damages, if any, should be determined at trial. Ironically, the bank official who refused to reduce Cathey's loan rate while deployed had retired from the same unit, the 412th Engineer Command in Vicksburg, Miss.
BancorpSouth argues that the loans were made to Stewart A. Cathey & Sons, Inc., a corporation. Loans to corporations, the bank maintains, are not protected by the SSCRA.
"Our bank didn't loan this man a nickel," said BancorpSouth's attorney, Charles C. Trascher. "It loaned it to the corporation, and the corporation paid the interest."
The bank, however, did require Cathey and his wife, Donna, as individuals, to co-sign the loans. Given that, Federal Magistrate Judge James D. Kirk refused to accept the bank's argument that the reservist wasn't liable for the loans.
"In an effort to spin silk from a sow's ear, the bank suggests that the plaintiffs are not the real parties of interest; rather that their corporation is," Kirk wrote. "Yet it is the plaintiffs' home which was put up as collateral for the loans and it is the plaintiffs' home upon which foreclosure proceedings were instituted. It is the plaintiffs who signed the notes and it is plaintiffs who, although a redundant requirement, guaranteed the loans. To suggest that they are not the real parties in interest is simply ludicrous."
Trascher, for BancorpSouth, said the foreclosure action on Cathey's home resulted from other loans, made after his return. Also, he said, "understand that this is a novel case. The plaintiff is attempting to use the Act in a way for which it was not designed — conducting a business. If this man had a car loan, house loan, or any direct loan to him, no question it would have been dropped to 6 percent. In this case, however, Stewart A. Cathey & Sons, Inc., borrowed close to $1 million as a corporation," said Trascher. "That, the SSCRA wasn't designed to address."
The trial could begin next June. If Judge James finds that Cathey is due substantial damages, BancorpSouth will appeal to the Fifth Circuit Court of Appeals in New Orleans, Trascher said.
Odom said he looks forward to bringing this case before a jury in northeastern Louisiana.
"You want to talk about conservative," Odom said. "My chance of having one or more jurors who are Guardsmen or reservists or veterans — or who are mothers, fathers, brothers or sisters of the same — is about 100 percent. There is only one kind of institution in America that jurors love to thump on more than insurance companies, and that's banks."
Although Cathey had trouble, invoking the rate-reduction provision for loans, Section 526 of the SSCRA, should be a breeze for most reservists. They just have to ask for it while presenting banks, mortgage companies or other lenders with a copy of their mobilization orders. The law makes no distinction between consumer and commercial loans. Loan relief should affect installment contracts, mortgages, liens and leases and even can be used to stop evictions.
In a recent interview, Craig W. Duehring, the Defense Department's top official for reserve affairs, encouraged lenders and civilian employers of reservists to educate themselves on all their obligations under the SSCRA and ensure that reservists and their families see little red tape.
"We've gone through a terrible crisis, unlike anything we've experienced in generations. People should be considerate and make the transition for our Guard and Reserve as smooth as possible," said Duehring.
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